IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GLENN J. KREVLIN, ) ) Plaintiff, ) ) v. ) ) C.A. No. 2022-0336-KSJM ARES CORPORATE ) OPPORTUNITIES FUND III, L.P., ) ARES CORPORATE ) OPPORTUNITIES FUND IV, L.P., ) DAVID G. HIRZ, LELAND P. ) SMITH, RICHARD N. PHEGLEY, ) CITIGROUP GLOBAL MARKETS, ) INC., and JEFFERIES, LLC, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: October 15, 2024 Date Decided: February 3, 2025
Neil R. Lapinksi, Phillip A. Giordano, Christopher P. Clemson, Madeline Silverman, GORDAN, FOURNARIS, & MAMMERELLA, P.A., Wilmington, Delaware; Counsel for Plaintiff Glenn J. Krevlin.
T. Brad Davey, J. Matthew Belger, Matthew A. Golden, Charles R. Hallinan, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Defendants Ares Corporate Opportunities Fund III, L.P and Ares Corporate Opportunities Fund IV, L.P.
Raymond J. DiCamillo, Matthew W. Murphy, Mari Boyle, RICHARDS, LAYTON, & FINGER, P.A., Wilmington, Delaware; Michele Johnson, LATHAM & WATKINS, Orange County, California; Zachery L. Rowen, LATHAM & WATKINS, New York, New York; Counsel for Defendant David G. Hirz.
David E. Ross, Roger S. Stronach, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Matthew Solum, Mike Rusie, KIRKLAND & ELLIS LLP, New York, New York; David A. Klein, KIRKLAND & ELLIS LLP, Los Angeles, California; Counsel for Defendants Richard N. Phegley and Leland P. Smith. Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Bruce Birenboim, Susanna M. Buergel, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Counsel for Defendant Citigroup Global Markets, Inc.
Martin S. Lessner, Mary F. Dugan, Nehama L. Hanoch, YOUNG CONAWAY STARGETT & TAYLOR LLP, Wilmington, Delaware; Scott S. Balber, Michael P. Jones, HERBERT SMITH FREEHILLS, New York, New York; Counsel for Jefferies, LLC.
McCORMICK, C. In April 2019, Smart & Final Stores, Inc. (the “Company”) announced that its
Board of Directors (the “Board”) had approved a merger agreement under which
affiliates of Apollo Management IX, L.P. (“Apollo”) would acquire the Company’s
outstanding shares (the “Merger”). The plaintiff owned Company stock. He brought
this lawsuit challenging the Merger. He alleges that the Merger was a conflicted-
controller transaction because the Company’s controller, a private equity firm, was
in “harvest mode” and harbored undisclosed, liquidity-driven conflicts that tainted
the sale process. He also contends that Company management, who stood to gain
change-of-control payments, pushed the Company toward the Merger. According to
the plaintiff, these facts and other material information were not disclosed to
stockholders. The plaintiff sued the Board and the controller for breach of fiduciary
duty. He also sued two of the Company’s financial advisors for aiding and abetting.
The defendants moved to dismiss the complaint under Rule 12(b)(6). They argue that
the Merger was not a conflicted-controller transaction and that the uncoerced, fully
informed vote of the stockholders warrants business judgment review under Corwin
v. KKR Financial Holdings LLC.1 They further argue that the plaintiff has not stated
a claim under the business judgment standard. This decision grants the motions to
dismiss.
1 125 A.3d 304 (Del. 2015). I. FACTUAL BACKGROUND
These facts are drawn from the Second Amended Verified Stockholder Class
Action Complaint (the “Second Amended Complaint”) and the documents it
incorporates by reference.2
A. The Company
The Company is a Delaware corporation headquartered in California. The
Company has two lines of business: a traditional grocery store chain (“S&F”) and a
business-to-business food service provider (“SFW”). Apollo sold the Company to Ares
in 2012, and the Company went public in 2014 through an IPO.
After the IPO, the Company pursued an aggressive expansion, opening 61 new
S&F stores and 15 new SFW stores. The expansion had a negative short-term effect
on the Company’s profit and loss statements and balance sheets. In 2017,
management began targeting e-commerce infrastructure as a business strategy. This
also adversely affected the Company’s profit and loss statements and burdened its
balance sheet with several large one-time technology initiatives aimed at retooling
key IT systems. The negative short-term effect on cash flow adversely affected the
trading price of Company stock. Management, however, repeatedly and publicly
expressed its confidence that these investments would ultimately benefit
stockholders.
2 C.A. 2022-0336-KSJM, Docket (“Dkt.”) 42 (“Sec. Am. Compl.”).
2 The plaintiff and his business partner routinely met with the Company’s
management team to discuss the Company’s performance, projections, and strategy.3
Around December 2017, the plaintiff had dinner with Company CEO David Hirz and
Company CFO Richard N. Phegley. They discussed the infeasibility of separating the
Company’s two lines of business, the need to find a capital partner, and Hirz’s belief
that competition from Amazon, which had acquired Whole Foods, and Aldi would not
affect the Company’s business.4
B. Ares
Ares Corporate Opportunities Fund III, L.P. (“Fund III”) and Ares Corporate
Opportunities Fund IV, L.P. (“Fund IV” and, together with Fund III, “Ares”)
collectively controlled about 57% of the Company’s voting power. They also appointed
two of the Board’s nine members. Dennis Gies and David Kaplan served as Ares’s
Board members.
Ares launched Fund III in 2008 and Fund IV in 2012. By 2018, Ares had begun
liquidating its holdings and significantly reducing its management fees in these two
funds. In its 2018 10-K filing, Ares stated that Funds III and IV were in “harvest
mode” and were “generally not seeking to deploy capital into new investment
opportunities.”5 In its 2019 10-K filing, Ares noted that it had been realizing gains
through monetizing investments held in Fund III and reiterated that Fund III was
3 Id. ¶ 37.
4 Id. ¶¶ 38–40.
5 Id. ¶ 133.
3 in “harvest mode.”6 In its 2020 10-K filing, Ares noted that it had stopped paying
management fees on Fund III.
C. The Company Looks For A Strategic Partner.
On December 17, 2017, Apollo requested a meeting with Hirz to discuss
investing one or more of its funds in the Company. Apollo stated its belief that the
market was undervaluing the Company. On January 8, 2018, Apollo proposed a $400
million investment to repay debt and fund a $200 million tender offer at $9 a share.
The Board rejected the proposal because it felt that the price was too low.
During a June 29, 2018 Board meeting, the Board formed a committee (the
“Committee”) to evaluate potential strategic alternatives. The minutes state that the
Board was concerned by the “meaningful challenges and headwinds” the Company
faced, including “difficulties enhancing stockholder value.”7 During the meeting,
Ares’s Gies told the Board that Ares “did not need to liquidate their positions in the
Company and did not currently intend to participate in any strategic transaction
involving the Company in any capacity other than on the pro rata basis together with
stockholders of the Company.”8
The Committee comprised Kenneth Tuchman, Paul Hopkins, and Joseph
Tesoriero. The plaintiff does not challenge the Committee members’ disinterest or
independence with respect to the Merger. The Committee retained Proskauer Rose,
6 Id. ¶ 136.
7 Id. ¶ 7.
8 Id. ¶ 54.
4 L.L.P. and Gibson, Dunn & Crutcher LLP as legal advisors. These firms also advised
Ares and the Board. These relationships were disclosed to the Board.
In July 2018, Gies and Hirz met with the Committee and its legal advisors to
select financial advisers. The Committee ultimately retained Jefferies, LLC and
Citigroup Global Market, Inc. Both financial advisors had previously worked with
the Company and had material relationships with Ares affiliates. Due to these
relationships, the Committee engaged a third financial advisor, Centerview Partners,
to render a fairness opinion. All of the financial advisers were renumerated on a
contingent basis.
With help from the advisors, the Committee developed a plan for identifying,
soliciting, and evaluating third-party interest, which included categorizing targets
into two tiers that distinguished between financial and strategic partners. On
October 28, 2018, Jefferies and Citigroup began contacting potential partners: three
Tier 1 strategic partners, ten Tier 2 strategic partners, and 15 Tier 1 financial
sponsors, including Apollo. By the time the Board voted to consummate the Merger,
the Committee had contacted 74 parties. Of the contacted parties, 38 executed
confidentiality agreements, eight attended in-person fireside chats, seven attended a
management presentation and submitted preliminary proposals, and four submitted
final proposals.
D. The Five-Year Plan
During the strategic-partner search, the Committee instructed management
to prepare financial projections for the five-year period from fiscal years 2019 to 2023
5 (the “Five-Year Plan”). Hirz, Phegley, and the Company’s General Counsel Leland
Smith prepared the Five-Year Plan. The Committee provided guidance during the
drafting process. On September 12, 2018, the Committee, management, and Gibson
Dunn attorneys met to discuss the underlying inputs and assumptions of the Five-
Year Plan. The Committee provided comments, which management incorporated.
On September 17, Hirz, Phegley, and Smith presented a revised Five-Year
Plan to Board members, Proskauer attorneys, and Ares representatives. The
projections in the revised plan showed EBITDA growth from $188 to $273 million
through 2023. At that meeting, the Board authorized the distribution of summaries
to “interested parties in the process at the appropriate time.”9
E. The Merger Transaction
During a November 14, 2018 third quarter earnings call, management was
positive about the Company’s economic performance. Hirz said that management
was “bullish” on the capital investments into their grocery stores and thought growth
in that line of business could “outpace [the Company’s] growth certainly this year and
in 2019.”10 Phegley noted that the Company would slow its capital investments,
freeing up cash to reduce the Company’s financial leverage, and predicted that
inflation would normalize. That December, management told investors that recent
food deflation was a “historical anomaly.”11
9 Id. ¶ 66.
10 Id. ¶ 72.
11 Id. ¶ 75.
6 In January 2019, the Committee began exploring the possibility of expanding
the process to invite parties to buy one of the Company’s two divisions on a standalone
basis. As of March 1, 2019, the Committee directed Jefferies and Citigroup to send
final bid process letters to nine remaining parties of interest, including Apollo. The
process letters instructed the interested parties to improve their proposed purchase
prices and submit a final proposal by March 15, 2019. Two days before the deadline,
the Company announced positive fourth quarter results.
On March 15, 2019, Apollo submitted a non-binding proposal to acquire all of
the Company’s outstanding equity at a purchase price of $6.50 per share in cash. The
price was conditioned on, among other things, the Company executing a 15-day
exclusivity agreement by the evening of March 17, 2019. Also on March 15, 2019, the
Company received proposals from: (i) Party J to acquire only S&F for $400 million;
(ii) Party B to acquire only SFW for $600 million; and (iii) Party D to acquire only
SFW for $700 million.
The Committee met on March 16 and 17, 2019, to discuss the proposals.
During the meetings, Committee members expressed concern that Party D’s proposed
acquisition of SFW “might entail complexities relating to regulatory filings and
clearances required for such a transaction.”12 The Committee decided that it would
not recommend entering into an exclusivity agreement with Apollo until the Board
had a chance to review and discuss all the proposals.
12 Id. ¶ 88.
7 The Board met on March 18, 2019, to receive an update on the strategic review
process and further discuss the four proposals received by the Committee. Based on
this discussion, the Board directed Jefferies and Citigroup to seek increased price
indications from the parties that had submitted proposals. Later that day, Jefferies
and Citigroup engaged in further negotiations with Apollo. Apollo increased its
proposed purchase price from $6.50 to $6.75 per share, subject to the Company
agreeing to exclusivity.
The Board met the next day. Based on the Committee’s recommendation, the
Board determined to enter into a 15-day exclusivity period with Apollo, through April
3, 2019.
Apollo engaged in confirmatory due diligence and, on March 25, lowered its
offer to $6.30 per share. Apollo also conditioned the lowered offer on exclusivity,
which the Committee declined to recommend in order to allow other interested
parties to resume diligence.
The Committee evaluated various proposals over the ensuing weeks. The
Committee was concerned about pursuing two complementary transactions that split
the Company’s businesses, as opposed to a single transaction that sold both business
lines. For this reason, the Committee requested that Party J submit a joint proposal
with Party D, which they submitted on April 11. They offered $6.50 per share.
In response to the combined April 11 offer, the Committee asked Parties D
and J and Apollo to improve their respective bids. Apollo rejected this request and
8 stated that it would withdraw its offer unless the Company agreed to enter into
another exclusivity agreement.
The Committee met again the next day, on April 12, 2019. Before the April 12
meeting, Parties D and J had reaffirmed their intent to submit a revised joint
proposal with a purchase price of $7.00 per share. During the meeting, however, the
Board’s financial advisors stated that Parties D and J indicated their equity financing
remained uncertain. Jefferies further advised that Parties D and J would likely
require four weeks of diligence before executing a definitive agreement. Based on
these considerations and “the meaningful risk in refusing [Apollo’s] demand for short-
term exclusivity,” the Committee determined to recommend that the Board enter into
a new, short-term exclusivity agreement with Apollo that would expire on April 15,
2019.13 The Committee further recommended conditioning exclusivity on Apollo’s
agreement to try to finalize a deal with a price of $6.50 per share over the next several
days.
The Board adopted the Committee’s recommendation on April 15, deciding to
provide Apollo with an additional twenty-four hours of exclusivity. Later that
evening, Parties D and J formally submitted their $7.00 per share bid.
Also on April 15, at the Committee’s direction, Hirz expressed to Apollo that
the Company would have difficulty retaining employees if the outstanding employee
equity awards were not accelerated and paid as part of the Merger. In response,
Apollo agreed to allow outstanding employee equity awards to convert into payments,
13 Id. ¶¶ 99–102.
9 accelerate the vesting and cashing-out of director and executive-owned options,
convert restricted stock into the right to receive cash payments, accelerate cash
awards to directors and officers, secure severance payments and benefits, and pay
transaction bonuses to C-suite officers.
Of the Company’s executives, Hirz and Phegley stood to gain the most from
these terms, with shares worth $8,646,814 and $5,045,086 respectively.14
On April 16, 2019, the Board held a telephonic meeting to consider the
proposals from Parties D and J ($7.00 per share) and Apollo ($6.50 per share).
Centerview advised the Committee that the $6.50 purchase price was fair. The
Committee determined that the proposed transaction was in the best interests of the
Company and its stockholders.
Subsequently, the entire Board unanimously determined that it was in the best
interest of the Company to enter into the Merger with Apollo and resolved to
recommend that the stockholders accept Apollo’s offer of $6.50 per share.
F. The Proxy Statement
The Company filed its Schedule 14D-9 on May 14, 2019 (the “Proxy
Statement”), recommending the transaction.15
The Proxy Statement disclosed the financial advisors’ conflicts.16 It further
disclosed the change-in-control payments that management would receive.17
14 Id. ¶¶ 106–107, 165.
15 Dkt. 44., Ex. A, May 14, 2019 Schedule 14D-9 (the “Proxy Statement”) at 31.
16 Id. at 26.
17 Id. at 10.
10 The Proxy Statement also provided a thorough description of the sale process,
including the higher value of the joint proposal from Parties D and J, and the Board’s
rationale for approving the Apollo offer. Among other things, the Proxy Statement
disclosed:
• The Company had experienced increased operational costs associated with being a public company;
• The $6.50 price was more favorable to stockholders than any other alternative;
• The price represented a 25% premium over the average closing price, which the Board felt was unlikely to improve in the near future;
• Prolonging the deal would further distract senior management from implementing the Company’s business plan; and
• The $7 per share joint proposal had material risks and uncertainties, would require significant legal and business diligence, and Party J still needed to secure additional equity financing to complete the proposed deal.18
On June 20, 2019, holders of 87% of the Company’s outstanding stock tendered
their shares, including 78% of the outstanding shares not held by Ares. The Merger
closed that day. Nearly two years later, on May 17, 2021, Apollo sold the Company.
G. This Litigation
Plaintiff Glenn J. Krevlin (“Plaintiff”) owned Company stock at the time of the
Merger. He filed this action on April 14, 2022, nearly three years after the Company
announced the transaction. He named Ares, Hirz, Smith, Phegley, Citigroup, and
Jefferies as defendants (collectively, “Defendants”). He amended his complaint on
July 15, 2022, and again on March 31, 2023.
18 Sec. Am. Compl. ¶¶ 115–117.
11 The Second Amended Complaint contains four Counts. In Count I, Plaintiff
claims that Ares breached its fiduciary duties as a controller. In Count II, Plaintiff
claims that Hirz, Phegley, and Smith (the “Individual Defendants”) breached their
fiduciary duties as directors and officers. In Count III, Plaintiff claims that Citigroup
and Jefferies (the “Financial Advisors”) aided and abetted the other Defendants’
breaches of fiduciary duties. In Count IV, Plaintiff claims that the Individual
Defendants committed waste, but Plaintiff later dropped the waste claim.19
Defendants moved to dismiss the Second Amended Complaint on April 28,
2023.20 The parties completed briefing on July 23, 2023,21 and the court heard oral
argument on October 15, 2024.22
II. LEGAL ANALYSIS
Defendants have moved to dismiss the Second Amended Complaint under
Court of Chancery Rule 12(b)(6). “[T]he governing pleading standard in Delaware to
survive a motion to dismiss is reasonable ‘conceivability.’”23 When considering a
motion to dismiss under Rule 12(b)(6), the court must “accept all well-pleaded factual
allegations in the [c]omplaint as true . . . , draw all reasonable inferences in favor of
the plaintiff, and deny the motion unless the plaintiff could not recover under any
19 Plaintiff abandoned the waste claim by failing to brief it. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). 20 Dkts. 44–48, 51.
21 Dkts. 60–65.
22 Dkt. 76.
23 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
12 reasonably conceivable set of circumstances susceptible of proof.”24 The court,
however, need not “accept conclusory allegations unsupported by specific facts or . . .
draw unreasonable inferences in favor of the non-moving party.”25
Defendants submitted five sets of briefs, each containing arguments unique to
the claims against them. They join in a common argument that resolves all issues.
Namely, Defendants argue that the Merger is not subject to the entire fairness
standard and a majority of fully informed, uncoerced and disinterested stockholders
tendered their shares. Under Corwin, “when a transaction not subject to the entire
fairness standard is approved by a fully informed, uncoerced vote of the disinterested
stockholders, the business judgment rule applies.”26 Defendants further contend that
Plaintiff has not stated a claim under the business judgment rule.
Plaintiff argues that the Merger is subject to the entire fairness standard
because Ares’s need for liquidity caused it to favor a deal, even at a suboptimal price,
over no deal at all. Alternatively, Plaintiff contends that Corwin does not restore the
business judgment standard because the stockholder vote was not fully informed.
24 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
25 Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011) (citing Clinton
v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)). 26 Firefighters’ Pension Sys. Of City of Kansas City, Missouri Tr. v. Presidio, Inc., 251
A.3d 212, 354 (Del. Ch. 2021) (quoting Corwin, 125 A.3d at 309); see also In re Volcano Corp. S’holder Litig., 143 A.3d 727, 738 (Del. Ch. 2016) (noting that in mergers consummated under Section 251(h), stockholder approval “by accepting a tender offer has the same cleansing effect as a vote in favor of that merger”).
13 A. Entire Fairness Does Not Apply.
“To determine whether directors have complied with the fiduciary standard of
conduct, Delaware courts evaluate their actions through the lens of a standard of
review.”27 The most deferential standard is the business judgment rule. The most
onerous standard is the entire fairness test. Enhanced scrutiny falls in between and
supplies the presumptive standard in a third-party, cash-out merger.28
Plaintiff seeks to ratchet-up to entire fairness by arguing that the Merger was
a conflicted-controller transaction. There is no dispute that Ares controlled the
Company. But that alone will not trigger entire fairness review of a third-party
deal.29 Rather, the controller must have divergent interests with respect to the
transaction that gives rise to a legally cognizable conflict. Plaintiff argues that Ares’s
need for liquidity rendered Ares conflicted with respect to the Merger.
“Delaware courts have been reluctant to find that a liquidity-based conflict
rises to the level of a disabling conflict of interest when a large blockholder receives
pro rata consideration.”30 In those circumstances, this court views the controller’s
27 Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *25 (Del. Ch.
Apr. 14, 2017). 28 See In re Mindbody, Inc., S’holder Litig., 2023 WL 2518149, at *32 (Del. Ch. Mar.
15, 2023), aff’d in part and rev’d in part, ---A.3d---, 2024 WL 4926910 (Del. 2024). 29 In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *12 (Del. Ch.
Oct. 24, 2014) (noting “a large blockholder will not be considered a controlling stockholder unless they actually control the board’s decisions about the challenged transaction”). 30 Presidio, 251 A.3d at 256; see also Larkin v. Shah, 2016 WL 4485447 (Del. Ch. Aug.
25, 2016) (rejecting a liquidity driven conflict theory); In re Morton’s Rest. Gp., Inc.,
14 interests as “presumptively aligned with those of the unaffiliated holders of the
Company’s common stock.”31 That is because Delaware law ascribes to the belief that
“when a fiduciary owns a material amount of common stock, that interest gives the
fiduciary a ‘motivation to seek the highest price’ and a ‘personal incentive . . . to think
about the trade off between selling now and the risks of not doing so.’”32 Liquidity-
driven conflicts can be difficult to plead,33 precisely because they ask the Court to
infer that “rational economic actors have chosen to short-change themselves.”34
Delaware courts are particularly chary to infer liquidity-based conflicts arising
from the lifecycle of a private equity fund. The leading case on this issue is
Firefighters’ Pension Systems of the City of Kansas City, Missouri Trust v. Presidio,
Inc. There, Vice Chancellor Laster surveyed the decisions of this court finding that
complaints adequately alleged that a need for liquidity gave rise to a disabling
conflict. None of the successful allegations rested on the lifecycle of a private equity
fund. As the Vice Chancellor observed, “the desire to wrap up an existing fund . . .
S’holders Litig., 74 A.3d 656 (Del. Ch. 2013) (same); In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012) (same). 31 Presidio, 251 A.3d at 255; see also Synthes, 50 A.3d at 1035 (“[W]hen a stockholder
who is also a fiduciary receives the same consideration for her shares as the rest of the shareholders, their interests are aligned.”). 32 Presidio, 251 A.3d at 255 (quoting In re Dollar Thrifty S’holder Litig., 14 A.3d 573,
600 (Del. Ch. 2010)). 33 In re Mindbody, Inc., 2020 WL 5870084, at *33 (Del. Ch. Oct. 2, 2020).
34 Larkin, 2016 WL 4485447, at *16 (citing In re Morton’s, 74 A.3d at 666–67); see also
Presidio, 251 A.3d at 260 (noting plaintiffs need to plead that the controller’s “desire for liquidity was so strong that [the controller] would choose to leave money on the table”).
15 can affect a fund manager’s approach to achieving liquidity for an investment.”35
That cyclical process, however, “is not so formulaic and structured that the cycle itself
would support an inference of a liquidity-based conflict.”36 Without more, therefore,
the lifecycle of a fund “does not necessarily create a problematic interest.”37
Here, Plaintiff rests his entire liquidity-driven conflict theory on the fact that
Fund III and Fund IV were in “harvest mode.” This, alone, is insufficient to render
Ares conflicted.
In an effort to demonstrate something more than the mere lifecycle of a fund
to support his conflict theory, Plaintiff makes a fleeting suggestion that the Funds’
harvest-mode posture was at odds with circumstances that favored the Company
continuing on as a standalone entity. These circumstances included: the Company’s
outperformance of management’s projections; a likely normalization in food inflation;
success on its long-term investment strategy; and buyers’ willingness to offer to
purchase segments of the Company at prices that were higher, in the aggregate, than
the deal price.38 But these factors point to valid business determinations by the
Board, determinations to which Ares is not alleged to have contributed.39 These
allegations do not give rise to an inference that Ares faced unique external pressures
35 Presidio, 251 A.3d at 258.
36Id. (citing Frederick Hsu Living Tr. v. Oak Hill Cap. P’rs III, L.P., 2020 WL 2111476, at *8–17 (Del. Ch. May 4. 2020) and In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *2 & n.2, *7 (Del. Ch. July 24, 2009)). 37 Presidio, 251 A.3d at *258 (citing Larkin, 2016 WL 4485447, at *15–16).
38 Dkt. 56 (“Pl.’s Answering Br.”) at 43.
39 See, e.g., Sec. Am. Compl. ¶ 173.
16 that would put its interest in gaining liquidity at odds with the Company’s best
interests.
Because the Merger was not a conflicted-controller transaction, enhanced
scrutiny presumptively applies.
B. The Business Judgment Standard Applies Under Corwin.
Defendants seek to ratchet-down the standard of review to business judgment.
Invoking Corwin, Defendants argue that the Merger was “approved by a fully
informed, uncoerced majority of the disinterested stockholders.”40 Plaintiff responds
by challenging the sufficiency of the disclosures in the Proxy Statement.
A plaintiff challenging the sufficiency of disclosures for Corwin purposes bears
the burden of pleading a disclosure deficiency.41 When assessing disclosure
deficiencies at the pleading stage, the court must determine “whether Plaintiff’s
complaint, when fairly read, supports a rational inference that material facts were
not disclosed or that the disclosed information was otherwise materially
misleading.”42 The inquiry is fact-intensive, and the court should deny a motion to
dismiss when developing the factual record may be necessary to make a materiality
40 125 A.3d at 306.
41 Morrison v. Berry, 191 A.3d 268, 282 & n.60 (Del. 2018), as revised (July 27, 2018).
42 Id.; see also Malpiede v. Townson, 780 A.2d 1074, 1086–87 (Del. 2001).
17 determination as a matter of law.43 One well-pled disclosure deficiency is sufficient
to defeat a Corwin defense.44
“An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote.”45 Stated
differently, “an omitted fact is material if there is ‘a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as
having significantly altered the ‘total mix’ of information made available.’”46
“Just as disclosures cannot omit material information, disclosures cannot be
materially misleading.”47 “[O]nce defendants travel[] down the road of partial
disclosure of the history leading up to the Merger . . . they ha[ve] an obligation to
provide the stockholders with an accurate, full, and fair characterization of those
43 See, e.g., McMullin v. Beran, 765 A.2d 910, 926 (Del. 2000) (reversing order granting defendants’ motion to dismiss where “answer[ing] the complaint, discovery and a trial may all be necessary to develop a complete factual record before deciding whether, as a matter of law, the . . . [d]irectors breached their [disclosure] duty”); Branson v. Exide Elecs. Corp., 1994 WL 164084, at *3 (Del. Apr. 25, 1994) (TABLE) (“Whether or not a statement or omission in an offering prospectus was material is a question of fact that generally cannot be resolved on a motion to dismiss, but rather it must be determined after the development of an evidentiary record.”); Wells Fargo & Co. v. First Interstate Bancorp., 1996 WL 32169, at *10 (Del. Ch. Jan. 18, 1996) (declining to rule that an omission was immaterial as a matter of law and noting that “[a] question of materiality is difficult to treat as a question of law on a motion to dismiss”). 44 Kihm v. Mott, 2021 WL 3883875, at *12 (Del. Ch. Aug. 32, 2021), aff’d 276 A.3d 462
(Del. 2022) (citing In re Mindbody, Inc., 2020 WL 5870085, at *26). 45 Morrison, 191 A.3d at 282 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944
(Del. 1985)). 46 Id. at 283 (quoting Rosenblatt, 493 A.2d at 944).
47 Id.
18 historic events.”48 A “[p]artial disclosure, in which some material facts are not
disclosed or are presented in an ambiguous, incomplete, or misleading manner, is not
sufficient to meet a fiduciary’s disclosure obligations.”49
Plaintiff argues that the Proxy Statement was materially deficient in three
ways.
First, Plaintiff repackages his liquidity-driven conflict theory, arguing that the
Proxy Statement was misleading because it failed to adequately disclose that Ares
“steered this process” while its funds were “in a harvesting posture.”50 This decision
has already found that Plaintiff failed to adequately allege a misalignment of
interests arising from the lifecycle of the Ares funds. The allegations fare no better
in the disclosure context. The posture of Ares’s funds was both innocuous and
48 Id. (citing Arnold v. Soc’y for Sav. Bancorp., Inc., 650 A.2d 1270, 1280 (Del. 1994));
Appel v. Berkman, 180 A.3d 1055, 1064 (Del. 2018) (“Under Delaware law, when a board chooses to disclose a course of events or to discuss a specific subject, it has long been understood that it cannot do so in a materially misleading way, by disclosing only part of the story, and leaving the reader with a distorted impression.”); In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 448 (Del. Ch. 2002) (“When a document ventures into certain subjects, it must do so in a manner that is materially complete and unbiased by the omission of material facts.”); 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 17.2[B][3][a], at 17-15 (4th ed. 2021) (“Although the board generally is not required to disclose all of the ‘bends and turns in the road’ in summarizing a proposed transaction, the Delaware Supreme Court has suggested that, once a board travels down the path of describing its process, it has a duty to provide a full and fair characterization of events.”); 2 Edward P. Welch et al., Folk on the Delaware General Corporation Law § 212.04[C], at 7-77 (7th ed. 2024) (“[I]f corporate fiduciaries volunteer information, even where there is no duty to disclose, they must do so truthfully and candidly.”). 49 City of Sarasota Firefighters’ Pension Fund v. Inovalon Hldgs., Inc., 319 A.3d 271,
304 (Del. 2024) (citing Appel, 180 A.3d at 1064). 50 Pl.’s Answering Br. at 46.
19 immaterial. This additional information would not have substantially altered the
total mix of information available to stockholders. Plaintiff’s first disclosure theory
does not work.
Second, Plaintiff takes issue with the Proxy Statement’s “avowal that
management did not negotiate its continued employment directly with Apollo.”51
Plaintiff contends that Hirz “used the Committee as management’s liaison with
Apollo to ensure management continuity—essential to the business plan’s ongoing
success—by bargaining for accelerated employee equity awards.”52 Plaintiff did not
plead this deficiency, which is a sufficient basis to reject it.
Also, it is unclear what more Plaintiff thinks should have been disclosed. The
Proxy Statement contains disclosures concerning accelerated management awards in
connection with the Merger.53 The Proxy Statement discloses that the Committee
asked Apollo to agree to accelerate awards for the purpose of employee retention.54
The Proxy Statement further discloses that “Apollo Management IX agreed to permit
the outstanding employee equity awards to be cancelled and converted into the right
51 Id. at 47.
52 Id.
53 See, e.g., Proxy Statement at 9 (disclosing that the “interests of executive officers
and directors of S&F include . . . the accelerated vesting and cash-out of Company Options” and “the partial accelerated payment of Company Cash Awards”); id. at 11– 12 (detailed disclosures, including names and dollar amounts, of accelerated awards). 54 Id. at 38 (disclosing that, on April 15, 2019, “at the direction of the Committee, Mr.
Hirz expressed his concern to representatives of Apollo Management IX regarding employee retention if outstanding employee equity awards were not accelerated and paid out to employees as part of the proposed transaction”).
20 to receive payment on the terms set forth in Item 3 under the heading ‘Treatment of
Equity and Cash Awards in the Transactions.’”55 Plaintiff does not contend that any
of those disclosures were inaccurate or misleading.
What Plaintiff really wants, it seems, is for the court to infer that Hirz or
management generally somehow controlled the Committee’s discussions with Apollo
on this point, but Plaintiff provides no basis for that inference. 56 Plaintiff’s second
disclosure theory fails.
Third, Plaintiff attacks a collection of disclosures concerning S&F’s projections
as a standalone entity and the business reasons for the Merger.57 Plaintiff claims
that the Proxy Statement was misleading when it “characterized food inflation and
e-commerce as ‘headwinds’” although management allegedly admitted “that inflation
was anomalous and at an inflection point[.]”58 In Plaintiff’s view, “e-commerce would
inure to [the Company’s] benefit as a result of the business plan.”59 Plaintiff also
takes issue with the Board’s assessment that the following factors weigh in favor of
55 Id. at 38.
56 See Teamsters Local 677 Health Servs. & Ins. Plan v. Martell, 2023 WL 1370852,
at *19 (Del. Ch. Jan. 31, 2023) (requiring “something more than speculation— communications, testimony—that employment discussions occurred between management and the acquiror during the sale process” to support a disclosure claim); English v. Narang, 2019 WL 1300855, at *12 (Del. Ch. Mar. 20, 2019), aff’d, 222 A.3d 581 (Del. 2019) (requiring that plaintiff “allege facts from which it reasonably can be inferred that such discussions occurred during the sale process” to support a disclosure deficiency based on process flaws). 57 Pl.’s Answering Br. at 48–49.
58 Sec. Am. Compl. ¶ 170.
59 Id.
21 a Merger: “uncertainty around retailer valuations”; “the potential for increased
competition from companies with greater scale and financial resources”; the
Company’s recent performance and business plan; the Merger consideration’s
certainty of value; and the cost of remaining a publicly traded company.60 Plaintiff
further disputes that the disclosure that “Amazon’s entry [into the retail grocery
business] was disruptive to e-commerce,” and the Board’s determination that
prolonging the sale process was not in the Company’s best interest.61
Nothing in this grab-bag of issues constitutes a disclosure deficiency. What
Plaintiff presents as disclosure issues are no more than disagreements with the
Board’s decision. Substantive disagreements with a board’s decision-making do not
amount to disclosure violations.62 Generally speaking, management’s speculation of
events to come concerning inflation and the state of the industry in the future are
“not an appropriate subject for a proxy disclosure.” 63 Plaintiff’s third theory of
disclosures, therefore, too misses the mark.
60 Id. ¶ 173.
61 Id.
62 See, e.g., In re JCC Hldg. Co., Inc. S’holders Litig., 843 A.2d 713, 721 (Del. Ch.
2003) (dismissing disclosure claim where “[t]he plaintiffs’ only beef” was alleged “mistakes in subjective judgment, even though those judgments were disclosed”); In re 3Com S’holders Litig., 2009 WL 5173804, at *6 (Del. Ch. 2009) (“There are limitless opportunities for disagreement on the appropriate valuation methodologies to employ, as well as the appropriate inputs to deploy within those methodologies. Considering this reality, quibbles with a financial advisor’s work simply cannot be the basis of a disclosure claim.”). 63 Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 145 (Del. 1997).
22 For these reasons, Plaintiff has failed to identify any disclosure deficiency
sufficient to render the stockholder vote uninformed. Because this was the only
attack on the Corwin defense, Defendants are entitled to review under the business
judgment standard. Plaintiff fails to state a claim under that standard.
III. CONCLUSION
Because Defendants’ Corwin argument is successful, the court need not reach
Defendants’ other arguments for dismissal. Defendants’ motions to dismiss are
granted.